Economist, Telegraph Columnist, Broadcaster

BNE INVISIBLE HAND: Russia curries favour in its “pivot East”

Russia’s recent “pivot East” has become a geopolitical cliché. It’s now widely understood that one of the most significant consequences of sanctions imposed by America and (less enthusiastically) the European Union has been significantly to strengthen relations between Moscow and Beijing.

Enemies for much of the Cold War, Russia and China have been building serious commercial and diplomatic ties across their 2,700-mile border for well over a decade. Since 2002, their bilateral trade has grown 7-fold, to almost $100bn annually, as both sides recognize the economic synergies between the world’s largest energy exporter and the biggest and most populous manufacturer on the planet.

Such Sino-Russian co-operation, though, has lately accelerated, as Moscow has sought to lessen the commercial impact of Western sanctions by deepening trade relations to the East. Far from shunning the Russians, the People’s Republic has become closer to its vast neighbour since EU/US travel bans, assets seizures and other trade restrictions were imposed on Russia last spring.

Back in June, following the annexation of Crimea, Western politicos and business bosses boycotted Russia’s flagship St. Petersburg summit. The Chinese, though, very publicly turned up to sign a $400bn 30-year gas deal with President Putin. That was followed by another Russia-China bilateral energy contract, sealed at November’s Apec summit in Brisbane, despite the presence at that meeting of President Obama himself.

Moscow and Beijing, in fact, struck no less than 17 bilateral deals at Apec – involving not just energy, but also electricity generation, insurance and import-export credits, while extending non-dollar settlement of the growing trade between them. So, amid on-going claims of “Russian isolation”, these two Eastern giants spent 2014 getting on with business, making crystal clear their shared interest in rejecting any notion of a US-dominated “unipolar” world. All this is now well recognized in the West, if not widely commented upon.

Far less understood has been the warming of post-sanctions relations between Russia and that other Eastern giant – India. In late November, Prime Minister Narendra Modi welcomed Putin to New Delhi. While the Russian delegation was looking to further diversify Eastern interests, the Indian hosts were keen to talk, above all, about burgeoning domestic energy needs.

It was a visit involving considerable diplomatic bonhomie, with Modi thumbing his nose at any Western distaste about doing business with Moscow. “Times have changed, but our friendship has not,” proclaimed Modi’s Twitter account, in Russian, as he entertained Putin. “The importance of this relationship and its unique place in India’s foreign policy will not change … we stick together through thick and thin”.

Amidst the niceties, commercial contracts worth over $100bn were signed – including a $50bn oil-and-gas agreement, a $40bn nuclear energy tie-up and deals in other sectors ranging from defence to fertilizers and space travel.

State-controlled Russian energy monolith Rosneft agreed a 10-year fixed-price contract to supply India with oil. Zarubezhneft and Oil India also signed a deal on joint exploration, production and transport. Rosatom, meanwhile, is to build 12 nuclear reactors on the sub-continent over the next two decades, while Russia and India will also co-operate on the production of 400 advanced twin-engine Ka-226T military helicopters.

Over 20 agreements were announced, including by Russia’s Alrosa diamond-mining group, that wants direct access to India’s huge cutting and polishing industry that now processes nine-tenths of all polished diamonds sold worldwide. Putin and Modi ended the summit by predicting bilateral Russian-Indian trade will reach $30bn by 2025 – small by Sino-Russian standards, but still representing a three-fold increase over 10 years.

While there’s been little discussion of the growing détente between Russia and India in the Western media, it could prove of similar significance to that between Russia and China. The two countries were Cold War quasi-allies, of course, with India a leading member of the “Nonaligned Movement” of Soviet-sympathizing developing nations. During the late 1960s and 70s, India saw the USSR as its main supporter on the UN security council and there was extensive collaboration across the scientific and defence sectors, with warm relations developing between Soviet and Indian elites. The collapse of the USSR, then, was traumatic for India, leading to a surge of economic cooperation with the US, as business between India and Russia withered.

That trend is now being reversed. Bilateral trade is expanding fast despite or even partly because of Western sanctions against Russia. Modi went as far as to declare his “opposition to sanctions imposed on Moscow without UN endorsement” during his summit with Putin, openly chiding the EU and US. He even expressed interest in joining the Russia-dominated Eurasian Economic Union, as well as the Shanghai Cooperation Organisation – an increasingly important trade and security organisation linking China, Russia and the Central Asian former Soviet states.

Defence will definitely feature heavily in the growth of Russian-Indian trade, building on shared history. India, which bought its first MiG fighter jet from the USSR in 1963, is now the world’s biggest arms importer. Already, during the four years to 2013, two-fifths of Russia’s weapons exports were sold to the sub-Continent. That very substantial defence sector trade is now developing into co-production and technology-sharing agreements. Russia and India have previously teamed up to develop a fifth-generation fighter jet. And this most recent round of agreements will see specialized Russian production facilities moving to India to build state-of-the-art helicopters in situ, a $3bn deal that is part of Modi’s flagship “Make-it-in-India” scheme.

Putin clearly views weapons, one of Russia’s few internationally-competitive export sectors, as a way partially to replace energy export revenues in the wake of lower oil prices. Closer Russian defence ties work for Modi too, given India’s need not only for security but also weapons technology often denied to them by the West. It’s noteworthy all three branches of India’s armed forces have conducted joint exercises with Russia since sanctions came into force. “Even as India’s options have increased,” said Modi during Putin’s visit, “Russia will remain our most important defence partner”.

India’s new-found audacity – as shown by Modi’s embrace of Russia and general West-baiting – stems from growing economic clout. With 1.2bn people, and already the world’s tenth-largest economy, India is on course to rank second behind China by 2040 – with America by then coming in third. On a purchasing power parity basis, adjusting for living costs, India is already the third-largest economy on earth.

Back in 2013, India looked vulnerable, with spiralling inflation, stagnating growth and an external deficit approaching 7pc of GDP. Since then, the country’s headline performance has been transformed. The world’s third-biggest crude importer behind the US and China, India is benefitting from oil prices that have fallen to a five-year low. That’s eased inflation, narrowed the external deficit and flattered the budget balance. A new UN report just forecast Indian growth of 5.9pc in 2015, up from 5.4pc last year, rising to 6.3pc in 2016 – rates of economic expansion over twice those predicted for the US and four-times those of the EU.

In elections last May, Modi’s BJP broke the rule of India’s Congress party, which had been in power since 1947. After campaigning as a pro-business candidate, vowing to tackle rampant corruption and India’s stultifying civil service, Modi now leads the first majority government in three decades. As a result, and boosted by lower oil prices, India is experiencing a strong feel-good factor, a wave of domestic hope it can grow strongly and take its development to the next level. Recent deals with Russia, not least on energy security, will do little to harm that cause.

Back in 1770, as the Western world’s industrial revolution began, India accounted for no less than 15pc of global output. Over the next one or two decades, the sub-continent, with its burgeoning population, tech-savvy business elite and ubiquitous shopping malls will become an economic superpower once more.

The EU and US have tried to punish Moscow with sanctions that have triggered steep drops in the ruble against the dollar and euro. Yet Modi, like China’s President Xi Jinping, has decided to ignore the West and use sanctions as an opportunity to strengthen commercial and diplomatic relations with Russia instead. The growing bond between China and Russia, given their shared interests, is among the mega-trends of our time. The deepening relationship between Russia and India isn’t far behind.